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Re: Treating a Building Improvement Correctly

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Newbie

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I would like to ensure that I am treating an asset correctly for our business.

We are in a leased building and we would like to have some works on the building completed to improve it as we will be here long term.

Our landlord has agreed to the changes and we have agreed to split the cost of the upgrade ($30K).

 

I have paid the total bill and our landlord will reimburse their 50% at some point this month or next.

Our auditors have advised me to account for the whole 30K in our building assets and then when the landlord pays us the $15K, to receive it as income.

Is this correct?

I would be receiving and depreciating a 30K asset that we essentially only own 50% of.

I would then be receiving 15K income that relates to this. (unless the auditor means I should offset this against the original asset requisition, but that is not the way it was communicated).

Also, I am sure the building owner will be accounting for the 15K in their assets also.

I want to ensure I treat this correctly from the start or it could get pretty messy come FYE.

 

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ATO Certified Response

Community Manager

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Hi @Justine_Ellis and @DuncanS,

 

We have heard back from our technical team on this one.

 

It is likely that such an arrangement can be characterised as a joint construction of improvements to the property that you lease.  On this view, both you and the landlord are sharing the costs. As you do not own the improvement you are not entitled  to a capital works deduction for the expenditure. It  is likely that your share of the costs is not immediately deductible as it secures an enduring benefit of a capital nature. However, your share of the cost may be deductible over five years as a Business related cost where you meet the requirements listed in that information.

 

Thanks, NateH

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Devotee Registered Tax Practitioner

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@Justine_Ellis 

 

Justine,

 

Interesting Question.

Some thoughts -

 

   Who will be the owner of the improvements?   Likely the Owner

   In whose name is the $30,000 Tax Invoice for the Improvements?  see Q1

 

   Should the Owner send you a Tax Invoice for $15,000 being your share?

 

Will await the ATO's views.

 

Duncan 

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Newbie

Replies 6

Thanks Duncan

Interesting questions from yourself too.

Our business is on the invoice but I guess you are right when you say that the owner would 'own' the improvements - It is not something portable that we could take with us if we moved.

However, the improvement would not have been made by the owner, it is somthing that increases the productivity and profitability of our business alone.

 

I definitley see where you are coming from and perhaps we should have got the owner to pay the 30K and then invoiced us for 15K.  I am sure this is something we could sort retroactively but as you say, will await the ATO view on it.

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Community Support

Replies 5

Hi @Justine_Ellis 

 

Thanks for your post.

 

Interesting question. We're looking into this one for you and will get back to you as soon as we can.

 

Thanks,

 

ChrisR

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Newbie

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@ChrisATO 

Thanks for this.  I've spoken with the building owner and the point we're at is that we believe that I should:

 

Receive the 30K into Fixed Asset Clearing

Invoice the owner 15K.

Offset the payment of 15K against FA Clearing and receive the remaining 15K into Building Improvement Assets.

We both end with a 15K asset and corresponding payment.

 

Please let me know your thoughts.

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Devotee Registered Tax Practitioner

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@Justine_Ellis @ChrisATO 

 

I believe the Owner would have a Non-Current Asset Account called Building Improvements Feb 2020 and the Tenant would have a Non-Current Asset Account called Leasehold Improvements Feb 2020.

 

The Depreciation/amortisation rates of Building Improvements and Leasehold Improvements would be different.

I understand Leasehold Improvements are amortised over the term of the lease eg 9 years.

In my practice, I do monthly Journals for Depreciation/amortisation as business owners have told me they wish not to have depreciation recorded as a year end adjustment.

 

I agree with you that it is far better to determine the accounting/tax treatment at the beginning rather than after the end of the FY.

Has your auditor approved your proposed accounting treatment?

 

Will await the ATO's thoughts.

 

Duncan

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Newbie

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Hi Duncan

 

Agree with your asset description and depreciation period comments - I have depreciated all other building related work according to the term of the lease and I also depreciate monthly like yourself.

 

My usual auditor is out of the country so my reason for asking here was that another person in their business advised me to receive the owners 15K as income which I don't feel is correct - this was just a quick phone conversation so it is possible I misconstrued the information.

 

However, for my own peace of mind I will wait for a difinitive answer from the ATO as you say and then go back to the auditor and confirm that they agree.

 

Thanks for your input, it is helpful.

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Initiate

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Hi DuncanS

 

I am reading this thread trying to understand the allowable depreciation for leasehold building improvements.

 

My reading suggests that it falls under Division 43, depreciable over 40 years. Obviously this isn't ideal for a business, especially when it holds a much shorter lease period of say 5 years.

 

I note your comment "Leasehold Improvements are amortised over the term of the lease eg 9 years". Could you please provide further details as to the basis of this? That would be a much better result.

 

Thank you in advance.

 

ATM

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Community Support

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Hi @AdelaideTaxMan

 

I see you have a separate post that we're looking into. If you like you can also contact our early engagement team as well for further advice.

 

Ari

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Most helpful response

ATO Certified Response

Community Manager

Replies 1

Hi @Justine_Ellis and @DuncanS,

 

We have heard back from our technical team on this one.

 

It is likely that such an arrangement can be characterised as a joint construction of improvements to the property that you lease.  On this view, both you and the landlord are sharing the costs. As you do not own the improvement you are not entitled  to a capital works deduction for the expenditure. It  is likely that your share of the costs is not immediately deductible as it secures an enduring benefit of a capital nature. However, your share of the cost may be deductible over five years as a Business related cost where you meet the requirements listed in that information.

 

Thanks, NateH